It’s a difficult time arguing for crypto’s revolutionary potential. The recent collapse of the Terra ecosystem has led to yet another round of premature obituaries for the crypto space, and DeFi has had a particularly torrid time.

But we should be wary of hasty judgments. The short-term view of technological disruptions on this scale is almost always misleading. As a16z’s recent State of Crypto report stressed, we remain in the earliest days of the blockchain-powered Web3 era. In terms of adoption, we’re somewhere around where the internet was in 1995 – a fairly primitive place, as those who remember it will confirm.

According to the futurist Roy Amara, we tend to overestimate the impact of new technologies in the short run and underestimate them in the long run. This has come to be called Amara’s Law.

Those in the crypto space would do well to keep Amara’s Law in mind. The enthusiasm of the 2020-21 boom led people to believe crypto was about to transform the world – and 2022 has been taken as a definitive refutation of these hopes. But the reality is that even the most ardent crypto evangelists may still be underselling its potential impact.

In this post, we’ll look at the longer-term prospects for crypto’s transformation of financial services. As we’ll see, while crypto has already displayed significant potential to accelerate financial inclusion, the future will see tokenisation extend beyond the digital realm, disrupting asset classes that have traditionally been considered beyond the reach of any but the wealthiest investors. 

The consequences could be monumental.

Driving financial inclusion through crypto

Key to the promise of crypto is its ability to reach those ill-served by traditional financial institutions. And though it may be easy for many in the affluent West to overlook, a staggering number of people fall into this category.

According to estimates by the World Bank, there are some 1.4 billion unbanked adults in the world. While many of these are in the developing economies of South and East Asia and Sub-Saharan Africa, significant numbers of people in high-income economies lack bank accounts. For example, a 2021 estimate by the US Federal Reserve put the figure of unbanked adults in the US at 5% of the population – approximately 16 million people.

The risks of being un- or underbanked are massive. At the most basic level, making and receiving payments without a bank account is becoming increasingly difficult. Getting access to credit is similarly challenging – it is almost impossible to build a credit history without using traditional financial services. Accumulating and maintaining savings is also significantly harder without the support of a bank.

Extending the reach of traditional banking may not be the solution. Many of these issues have been exacerbated by centralised financial institutions. For example, the unbanked are often wary of opaque fees charged by banks. In addition, the verification procedures can limit access for those lacking stable housing or recognised forms of identification.

Finally, and most fundamentally, there remains a widespread lack of trust in the banking sector. A 2018 survey found that 66% of UK adults did not trust banks to prioritise social responsibility. And for those from minority backgrounds, the issue is likely to be worse. Less than half of Black British business owners trust banks to have their best interests in mind.

In this context, cryptocurrencies and related DeFi services have the potential to accelerate financial inclusion by bypassing centralised institutions radically. Nowhere is this clearer than in Sub-Saharan Africa.

Cudos’ partner KamPay, for instance, has been developing a number of pioneering blockchain-driven strategies to help millions across Africa access financial services. Alongside a user-friendly multi-sig wallet and micro-lending for agriculture projects, they have recently launched Coding Africa, a revolutionary program to help young Africans to develop their tech knowledge.

Source: KamPay twitter

The Coding Africa project will help to lower barriers to entry in the blockchain space by sharing knowledge around key concepts and practical issues, from how blockchains work to setting up a wallet and starting to trade. 

And that’s not all. The courses will also function on a learn-to-earn basis, rewarding students with KamPay and Cudos tokens as a way to kickstart their access to crypto services. In addition, the project will be running live events over the next three months, with plans to launch events in Uganda, Kenya, Nigeria and Ghana through July.

Beyond access: Closing the wealth gap

Extending access to financial services is certainly a laudable goal for the crypto community to embrace, but it’s just the first step. As the World Bank has argued, financial inclusion is about more than just extending basic services to those ignored by centralised institutions. The broader goal is to reduce poverty and inequality by ensuring that as many people as possible see the benefits of economic growth.

And this is where the crypto space could have its most transformative impact.

It is now widely recognised that income and wealth inequality have been steadily increasing since the 1970s. A recent report by the Institute for Fiscal Studies (IFS) found that the share of income going to top earners in the UK had increased inexorably over the past forty years. In 1980, the top 1% received 6% of income; by 2018-19, this had reached 15%.

If we turn to wealth inequality, the situation is even worse, partly as a result of COVID-19. According to Oxfam, billionaire wealth increased by 42% during the pandemic. 

The world’s ten richest people now have greater wealth than the poorest 40% of humanity. The wealth of the richest twenty exceeds the GDP of the entirety of Sub-Saharan Africa.

These statistics are shocking, but how do we explain them? What has caused this astonishing level of inequality?

Powering this troubling trend are the outsized gains of those able to invest capital. As the pioneering work of the economist Thomas Piketty has shown, the rate of return on capital has consistently exceeded GDP growth since the 1980s. As a result, those who were able to make capital investments increased their wealth much more rapidly than those who were not.

The past forty years hardly suggest that centralised finance has the solution. The reality is that the barriers to entry for investment remain significant. Simply amassing the capital to begin investing can be challenging for those whose real incomes have been steadily eroded, as well as entailing a disproportionate risk of losing access to vital funds in an emergency.

When it comes to the most lucrative opportunities – such as investing in property development – these are often restricted to those with significant wealth at their disposal already. Legacy institutions, from banks to asset management companies, are generally disinclined to expend energy on those with relatively small sums to invest.

Can crypto provide a solution where centralised finance (CeFi) has failed?

DeFi, tokenisation, and the future of investment

The DeFi space has already displayed its potential to democratise wealth-generating opportunities. From simply buying and HODLing a given cryptocurrency to utilising more elaborate strategies – day trading or peer-to-peer lending, for instance – a whole new world of investment possibilities has emerged. And thanks to the trustless and permissionless nature of the blockchain, anyone is free to get involved.

But DeFi was not the only new way to build wealth that gained prominence in 2021. The NFT boom offered radical new ways to invest outside traditional institutions.

As we’ve discussed elsewhere, NFTs have transformed a range of industries by solving the problem of digital scarcity. That is, they’ve enabled the production of verifiably unique digital assets. As a result, everything from digital wearables to virtual real estate can now be bought and sold on open, peer-to-peer marketplaces.

Consequently, NFTs have opened up whole new asset classes for investment – and even legacy institutions have begun to take notice. For example, a recent report by French investment bank Societe Generale noted that major Wall Street players were starting to turn their attention to digital assets and highlighting their own move into digital asset investment.

Nevertheless, the focus on NFTs as enabling mass-scale investment in digital assets is too limiting. While this is the most obvious use case for NFTs, it serves to reinforce a widespread misunderstanding that NFTs simply are digital assets.

The truth is more complex. An NFT is a digital proof of ownership that can be freely traded; it is verifiably unique and cryptographically secure. While the advantages of this for digital asset trading are obvious, the asset to which an NFT is tied need not be digital. It can be physical or even experiential – think of access tokens, for instance, allowing you to enter a concert or a sporting event.

The consequence is that anything and everything can be tokenised. The benefits of tokenised trading – the lack of institutional constraints, for instance – can be extended beyond the digital asset space into the world of physical assets. This includes real estate and other illiquid commodities. It even extends to emerging markets like the space economy, as Cudos’ latest partner Copernic Space is proving.

Of course, tokenisation will not, in and of itself, solve the problem of access for lower-income investors. The financial barriers to investing in real estate, for example, are extremely high, and simply tokenising property would not solve this. Indeed, we’re seeing the same problems emerge with the most lucrative digital assets: at the time of writing, buying a Bored Ape on OpenSea would set you back at least £84,000.

And that’s where the recent development of fractionalised NFTs begins to display its genuinely revolutionary potential.

The fractionalised ownership revolution

Fractionalised ownership is not an entirely unfamiliar concept for investors. For example, stocks and shares have always been traded on a fractional basis, allowing people to invest smaller cash amounts rather than having to spend, for example, $140 on a single Apple share.

There have also been attempts to extend this type of ownership to other assets, such as property. But these have often relied on elaborate and cumbersome institutional arrangements – for instance, through a property management company.

The development of fractionalised NFTs (F-NFTs) offers the prospect of an open, decentralised alternative in which investment in virtually any asset class can be made widely accessible.

F-NFTs, as the name implies, result from the fractionalisation of a single NFT into smaller units of identical size. Through this process, any asset – physical or digital – can be converted into a theoretically unlimited number of tokens. These tokens are fungible among themselves and can be bought or traded individually.

The consequences of this relatively simple development are hard to overstate. Not only does this mean that any asset can be brought on-chain through tokenisation, but also that investors of all sizes can reap the rewards. For example, rather than buying a single NFT for a given asset, investors can buy a fraction, generating proportional returns on their investment as the asset appreciates.

By opening up wealth-generating strategies to those on lower incomes, fractionalised tokenisation can act as a brake to the accelerating trajectory of income and wealth inequality. As a result, the high rate of returns on capital will no longer be the exclusive preserve of those already holding significant wealth.

Instead, virtually anyone, anywhere in the world, will be able to build a diversified investment portfolio that stretches from currencies and digital assets to real estate and beyond. The automation benefits provided by smart contracts can cut out unnecessary intermediaries and lower administrative overheads while making the process simpler and more user-friendly.

Of course, a range of complex issues remain to be solved to make this a reality. Emerging regulatory frameworks, for instance, may significantly impact the evolution of tokenised investment. But when reflecting on the long-term impact of tokenisation on financial services, we’d do well to keep Amara’s Law in mind.

How Cudos is supporting financial inclusion through blockchain

Here at Cudos, we are committed to being part of the solution to growing inequality. We’ve taken many proactive steps to reduce the growing wealth gap, including partnering with organisations that see crypto as a critical driver of financial inclusion.

But this is just the first step – our ambitions extend much further. Following the successful launch of our mainnet, we are now pushing toward developing our decentralised cloud computing network, Cudo Compute.

Aside from the environmental benefits and enhanced stability that the decentralised cloud will offer, it will also create significant new opportunities for generating passive income. By providing a straightforward way for people to lease their unused computing power, Cudo Compute will allow the owners of underutilised devices across the globe to find a new source of revenue.

If you’d like to learn more about our efforts to build a sustainable and scalable future for Web3, head over to our mainnet page.

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About Cudos

Cudos is powering the metaverse bringing together DeFi, NFTs and gaming experiences to realise the vision of a decentralised Web3, enabling all users to benefit from the growth of the network. We’re an interoperable, open platform launchpad that will provide the infrastructure required to meet the 1000x higher computing needs for the creation of fully immersive, gamified digital realities. Cudos is a Layer 1 blockchain and Layer 2 community-governed compute network, designed to ensure decentralised, permissionless access to high-performance computing at scale. Our native utility token CUDOS is the lifeblood of our network and offers an attractive annual yield and liquidity for stakers and holders.

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